The much anticipated, and needed, >‘Start-up India’ initiative was launched last weekend by Prime Minister Narendra Modi in a move to help start-ups and catalyse entrepreneurship. Start-ups and entrepreneurship are critical to India’s efforts to restart private investment into the economy, in the face of risk aversion, stalled or slow investments from corporate India.
Start-ups in India have faced two significant obstacles. One is government apathy, corruption and a complex approvals process. The other is the power of entrenched corporates, to oppose or kill start-ups which challenge them. So while the Action Plan unveiled by Mr. Modi is a catalyst, also needed are structural reforms that permit free and fair competition and other issues that determine the viability and existence of start-ups. Net neutrality, for instance, is a policy requirement that will determine the future for tech start-ups.
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The Start-up India Action Plan lists out a comprehensive set of structural and regulatory reforms in order to achieve this. Income tax exemption, easing compliance through reduction of regulations and having fixed qualifications as to what a ‘start-up’ is, were expectations at the top of the entrepreneurial bucket-list.
But the Action Plan goes further. It goes on, for instance, to provide an 80 per cent waiver on patent filing fees by start-ups, provide advisory services and create a Rs.10,000 crore fund-of-funds which is to be managed by professionals drawn from the private sector. These are just a few of the ‘sweetheart’ deals for start-up entrepreneurs under the Action Plan.
Money matters But the Action Plan also appears to have a few flaws which need to be addressed. For instance, it sets up an ‘Inter-Ministerial Board’ led by the Department of Industrial Policy and Promotion which ‘validates’ the innovative nature of an enterprise, thereby qualifying it as a start-up – an involvement of government in this ecosystem that is hardly desirable. It also requires a start-up to obtain a recommendation from an incubator in order to be eligible. The most obvious and tangible benefits to start-ups under the Action Plan are the tax breaks and funding support. The Action Plan waives income tax on profits for a period of three years and also exempts taxes on capital gains which are invested in the ‘fund-of-funds’.
This move will help to reduce cash outflows and bring down the cost of running a start-up. In conjunction with the waiver of the ‘angel investor’ tax under the Finance Act, 2013, start-ups now can have improved access to funding opportunities.
Pending reforms like the GST regime, would also make it easier for small start-ups to operate across the country.
Rs.10,000 crore ‘fund-of-funds’ The Rs.10,000 crore ‘fund-of-funds’ is a significant financial commitment by the Government under the Action Plan. It is set to start with Rs.2,500 crore initially with the amount set to recur for 4 years.
This mega fund will not directly invest in start-up ventures. Instead, it will do so via SEBI registered venture funds. This fund will contribute a maximum of 50 per cent of the daughter fund size, providing a significant boost to the corpus of investments that start-ups have access to. It is important that this corpus is not managed by Politicians or bureaucrats, but smart, savvy fund managers who have a track record on investing.
On the cost saving side, an 80 per cent rebate on patent filing costs alongside an exemption from having ‘prior-experience’ to be eligible under the public procurement process are steps taken to promote tech-based start-ups in particular.
While tax incentives, cost saving measures and funding support will undoubtedly drive up investment into innovative start-ups it is essential that the government not lose sight of non-tech start-ups. It should make special provisions to ensure that this support structure extends to the agriculture, manufacturing, and handicrafts sectors.
Ease of doing business Promoting start-ups by improving ease of doing business is clearly at the forefront of the Action Plan. A significant benefit a start-up accrues under this policy is the waiver from labour inspections for 3 years.
Now, anyone who has run a business and navigated the maze of bureaucracy understands the quagmire that labour laws can be, especially for a start-up. Along with the ease in environmental checks, these changes to labour inspections are a step in the right direction — particularly for those start-ups which are based in the manufacturing sector. But the Action Plan exempts starts-up from inspection under a fixed number of labour laws — six to be specific. There are about 45 laws at the central level and about four times this number at the state level. The Centre needs to work with the States to ensure a smooth rollout of the benefits under the Action Plan and avoid discord between policies at the two levels.
‘Start-up India Hub’ The Action Plan also creates a centralised system under the ‘Start-up India Hub’ which assists start-ups by providing advisory services on financing, business structuring and improving management skills. It also provides for a mobile app which allows start-ups to self-certify themselves and also acts as a single point of contact between entrepreneurs, regulators and the government. This is a positive move in simplifying the registration process.
This is perhaps the most pertinent question which has been answered by the Action Plan. In order to obtain the wide ranging benefits which have been detailed in the 40-page Action Plan, it is essential for an enterprise to qualify as a ‘start-up’. An uncontroversial requirement, but the devil is in the details.
The Action Plan requires an enterprise or partnership to be innovative by developing and commercialising a new product or service — a step to promote truly innovative ideas. But it institutes an inter-ministerial body led by DIPP to examine whether an enterprise is ‘innovative’.
It also requires a ‘recommendation’ from an incubator setup by the government or be supported by an incubator in a post-graduate institution recognised by the government — this need for validation and recommendation goes against the very steps the Action Plan takes to reduce government involvement. This additional layer of bureaucracy could slow down the starting up process and needs to go.
Start-up India is consistent with the PM’s call for innovation when he launched Digital India. The Start-up India Action plan is a good start to this – but will need continued support and evolution to make this a true, deep revolution for the youth of India.
The author is a Member of Parliament & a Tech Entrepreneur
rajeev.c@nic.in
